One of the take away points that Fukuyama made was on Chinese democracy: It won't come anytime soon. The idea that development will push democracy in China doesn't work, he said. No one knows whether Chinese will accept the notion that the country has to embrace human rights to get what it wants. Fukuyama's concern is that gains from growth in China are so lopsided that democratic representation could mean a redistribution of wealth that would cancel out those gains. In any case, China could become the first country to democratize over the environment "because the are poisoning themselves." But he is optimistic for the long run.

In the book, Fukuyama, Calder, and their coauthors grapple with a changing security environment in East Asia where the traditional hub and spoke system has become outdated. What is dramatically different about the current situation, argues Fukuyama, is "the changed posture of South Korea... South Korea has shifted from being a bastion of anti-communism to seeking reconciliation and ultimate reunification with North Korea." Meanwhile, Korea-China relations have warmed. The South Korean spoke is "slowly rotting away."

To deal with new trends in China, South Korea, North Korea, and Japan, the United States needs to consider a multilateral framework for Asia, beyond the hub and spoke system. As Kent Calder put it, Northeast Asia is under-institutionalized, suffering from an organization gap. The areas of promise for institutionalization include the environment, energy, and finance.

Fukuyama outlined five options in his chapter:

Option one would be to maintain the current bilateral system and oppose multilateral institutions that do not include the United States, as Richard Armitage has argued.

Option two would be to lay the foundations for a multilateral containment barrier against China. He said a "sophisticated version" of this idea is contained in the project I ran at CSIS. In that project, Sherman Katz, Robert Fauver, and I argued for an East Asian economic community that would "incorporate as criteria for membership certain elements of good governance--for instance, rule of law, transparency, government accountability, and so on," as Fukuyama put it. You can read my proposal with Katz for these Comprehensive Economic Partnership Agreements (CEPAs) here from the American Interest.

Option three would be to create a five-power organization based on the six party talks. This is a proposal that Ian Bremmer and many others have proposed. My only critique about this concept is that it not take on too many sectors, as I argued in the National Interesthere.

Option four would be to revitalize existing forums such as APEC in which the United States is a member. This is a concept that has been touted by many government officials in public but sometimes scoffed at in private. Many say that APEC is too big to get anything done.

The final option would be "re-Asianize" Japan by taking an existing forum such as ASEAN Plus Three and having Japan engage that forum in a more meaningful way. This idea was pushed by Kazuhiko Togo in the book and seemed to be Fukuyama's preferred route.

Monday, April 21, 2008

I was speaking with media expert and Asia specialist Thomas Crampton this morning about the Beijing Olympics panel we would like to hold at the Carnegie Council as part of our Workshops for Ethics in Business series supported by Booz Allen. We would hope to hold a balanced discussion on what companies have learned from doing business in China over the years.

Tom mentioned an interesting new book to check out: China Price by Alexandra Harney. According to the Penguin website, the book “uncovers the truth about how China is able to offer such amazingly low prices to the rest of the world. What she has discovered is a brutal, Hobbesian world in which intense pricing pressure from Western companies combines with ubiquitous corruption and a lack of transparency to exact an unseen and unconscionable toll in human misery and environmental damage.”

To counter these types of critiques, however, a new genre of web content has emerged. Tom blogs about what he calls “user generated propaganda” here. You can watch several examples, including one PowerPoint style video and a hip-hop video.

Friday, April 18, 2008

Did anyone see the recent South Park episode in which the Internet stopped and the kids went to California to find "more" Internet?

We are experiencing something similar on our other blog, The Ethical Blogger, which has been locked down by Google due to suspected spam-like activity near or around the blog. I feel like I can't use part of the Internet.

With so much email spam in the world, I had proposed a while back that people communicate with one another over blogs to ensure maximum transparency. (Unfortunately, people even libel one another on blogs and YouTube, as the New York Times reported today. When people ask what do we mean by ethical blogging, this article illustrates the problem precisely.) But with blog spam, I guess that medium is not totally reliable either. Of course, The Ethical Blogger is not a spammer.

The Ethical Blogger, which coincidentally has been called a blog of note by Google's Blogger (blogspot), will be back once Google verifies the blog is run by "actual people." In the meantime, we see this apologetic message on our dashboard:

Your blog is locked

Blogger's spam-prevention robots have detected that your blog has characteristics of a spam blog. (What's a spam blog?) Since you're an actual person reading this, your blog is probably not a spam blog. Automated spam detection is inherently fuzzy, and we sincerely apologize for this false positive.

We received your unlock request on April 15, 2008. On behalf of the robots, we apologize for locking your non-spam blog. Please be patient while we take a look at your blog and verify that it is not spam.

The economic argument in favor of free trade centers on efficiencies gained through specialization, not on the opportunity for increased political leverage that can be brought to bear on trading partners. Yet, many of trade's harshest critics insist on linking the two. Why? Many of these same critics howl in protest - and rightly so, I think - at the hawkish promotion of democracy through military intervention that has characterized the last several years of U.S. foreign policy. Violence aside, both approaches represent a degree of unwanted meddling in the sovereign affairs of another nation. Both approaches are intended to bring about a positive change in the lives of ordinary citizens. There is an argument to be made that the best thing you can do to help poor people living in less-than-open socities is to trade with them. But it's an economic argument and, therefore, destined to be misunderstood, discounted as a tool of commercial interests or, worse, manipulated to reach an opposite conclusion.

The promise of freer trade can be a useful carrot in a nation's foreign policy toolbox, I'm not denying that. Market access and closer political ties are often strong incentives for targeted domestic reforms in areas such as labor rights, environmental stewardship and civil liberties. Yet, the economic argument in favor of free trade says nothing about these effects. They have been linked to trade over the years by political actors and used to demonize what is essentially a positive aspect of a nation's development: openness.

I am tempted to reprint Robert J. Samuelson's entire column from today's Washington Post. I won't. But the following excerpt makes many of my points for me. Quite frankly, I wish I had written it myself.

...[I]t's politically convenient to oppose the [Colombian free] trade agreement because the popular imagery is that trade destroys U.S. jobs. The loss of almost 4 million U.S. manufacturing jobs since 1998 seems easy to explain by cheap imports or the flight of plants to Mexico, China and other poorer countries. The truth is murkier: Although this has occurred, job losses also stem from greater efficiency (fewer workers producing more goods) and slumping domestic demand (for communications equipment and computers after the dot-com bust and for housing materials and vehicles now). Nor has falling factory employment crippled overall U.S. job creation.

Look at the numbers. From 1998 to 2007, total non-farm payroll employment rose 12 million, and unemployment averaged only 4.9 percent -- despite the 4 million lost factory jobs. In that period, U.S. manufacturing output rose 22 percent.

No matter. Globalization and trade have become lightning rods for myriad grievances (job insecurity, wage inequality, eroding fringe benefits). But even if trade caused all the factory job loss, its impact is shifting. The dollar's dramatic depreciation (down an inflation-adjusted 20 percent since early 2003 against a basket of currencies) has enhanced the competitiveness of U.S. exports. Their growth now looms as a major source of job creation and economic expansion.

Friday, April 11, 2008

One of the topics we cover at Policy Innovations is trends in social organization, how they affect globalization, and vice versa. Based on his new book, Michael Edwards of the Ford Foundation wrote an interesting article for openDemocracy on the subject of philanthrocapitalism—the "movement to harness the power of business and the market to the goals of social change." He believes it's time to look past the hype and really debate whether this influx of market mojo is delivering what it claims. Are social goals compromised in favor of financial ones?

[ASIDE: We ran an article by Laura Raynolds of Colorado State University not too long ago discussing a similar moment in the evolution of Fair Trade. Raynolds argues that Fair Trade's new position in the marketplace—due to success in scaling up and expansion into new products—puts it in conflict with its social goals.]

Edwards believes that civil society's shift from community organizing to services provision represents an erosion of the sector's power to participate in social transformation: "The accumulated outcome is that civil society may be getting larger—but not stronger or more effective in leveraging fundamental changes in society."

What are the changes Edwards wants to see?

Systemic change has to address the question of how property is owned and controlled, and how resources and opportunities are distributed throughout society.

How do we get there?

[C]ollaboration among separate organizations may be better than blending or competition. It preserves the difference and independence required to lever real change in markets (not just extend their social reach), and to support the transition to more radical approaches that might deliver the deeper changes that we need, like new business models built around "the commons" such as open-source software and other forms of "non-proprietary production"; and community economics and worker-owned firms, which increase citizen control over the production and distribution of the economic surplus that businesses create.

How do we keep nonmarket civil society motivated?

What separates good and bad performers is not whether they come from business or civil society, but whether they have a clear focus to their work, strong learning and accountability mechanisms that keep them heading in the right direction, and the ability to motivate their staff or volunteers to reach the highest collective levels of performance.

I think the most important critique Edwards makes is that market-style projects shouldn't be the sole logic of civil society—social entrepreneurism has hit the scene with a fair amount of zeal. If civil society acts as a social immune system, as Paul Hawken puts it, then that system should have several curative options. Plus, people are more and more motivated to find meaning in their work—social entrepreneurs are filling a niche.

When critiquing the new unity of philanthrocapitalism, Edwards sets it in comparison to the diversity of actors that was required in successful social movements of the past. But right now there is no unified movement. The only thing comparable is the set of actors that are pushing the shift to an environment-friendly lifestyle—though goals may overlap, they are loosely bonded at best in their actions. And the problem they are trying to solve is so inherently tied to our existence as consumers, making it no surprise that fast-acting market forces have swooped into the new environmental gap in our political consciousness.

Has philanthrocapitalism only flourished because civil society becomes too calcified when it is based on institutions instead of a broad social struggle?

His argument was that the global financial system is built upon a false paradigm. All human constructs are flawed. We need to stop relying solely on the market. He said financial markets do not tend toward equilibrium. Rather they move dramatically, swinging in extremes of despair and optimism. Therefore financial bubbles emerge.

Bubbles are partly based on realities, such as the Internet. But some parts are misconception. The extremes are occurring more frequently than they are supposed to. Now you have two bubbles: the housing bubble, which has burst, and a super bubble that has been developing for the past 25 years since the Reagan-Thatcher years. It involves an increased use of credit relative to GDP. Market fundamentalism is a misconception that has followed and led to financial crisis. The authorities have tried to intervene, stimulating the economy, but also reinforcing the misconception that markets can be left to their own devices.

What we have now is a turning point in which this interaction doesn't work anymore.

What about other busts that might hit the global economy? He said, the scariest market is the credit default swaps (CDS). (Related Bloomberg article here.) It is totally unregulated and hangs like a Sword of Damocles. A clearinghouse is needed in which trades would be registered under established rules. Otherwise, there is too much uncertainty about counterparties. From Bloomberg:

Credit default swaps -- a way to bet on the creditworthiness of a company -- may be the next crisis area because the market is unregulated, and it's impossible to know whether counterparties can meet their obligations in the event of a bond default. The market has a notional value of about $45 trillion -- or about half the total wealthof U.S. households. Soros recommends the creation of an exchange with a sound capital structure and strict margin requirements, where current and future contracts could be traded.

Soros said the acute phase of the crisis is over. He said the bailout of Bear Stearns proves that the authorities will do what they need to do. The Bear Stearns bailout was a market bottom. But now you have fallout, which cannot pass without having long term effects on the global economy—it’s whistling in the wind.

Soros believes that authorities do need some control over asset bubbles. They cannot go by simple rules but it is more of an art to make sure excesses don’t go too far. You need margin regulations.

Where is future economic growth going to come from? First, you need to minimize U.S. foreclosures. The American consumer has been the motor of the global economy, but that is coming to an end. You need a new motor. The big challenge is global warming and investments are needed to reduce carbon emissions. Addressing climate change could be the next motor for economic growth.

Economist Paul Krugman said this morning at the Carnegie Council that nonbank institutions could be nationalized in the United States. He called it the Nordic Model. I asked Mr. Soros if that would be possible. He said it is a fall back and a possibility but raising capital is preferable to nationalization.

The last question came from a Russian journalist who asked if Soros planned to invest in Russia. "Absolutely not," he said, saying he had been burned too many times in Russia. He is on the record for calling Russia "robber capitalism"--with no legal or financial controls.